‘We try to fight rhetoric with facts’: Group defends online lenders
What is fair in lending?
If a fintech is offering high-rate loans to people with low or no credit, is that fair? What if he charges three-digit annual percentage rates? What if these people can’t get credit anywhere else?
If a bank offers loans with decent interest rates to people with high credit scores, but ignores large swathes of people who are disproportionately black, Hispanic and other of color, is that fair?
Banks and fintechs are navigating a moral and ethical gray area when trying to extend credit to low-income, low-credit people, especially when charging high interest rates to cover risk the highest. A newly formed group of bankers, online lenders and consumer advocates will attempt to settle questions about what is fair, as well as questions about the potential for bias in the use of AI in lending and the need explain AI-based lending decisions.
The new organization, which is called MoreThanFair, hopes to enable more Americans to get mainstream loans, develop best practices for the industry and reduce the stigma of online lending. Members include Cross River Bank, National Bankers Association, National Consumer Law Center and Upstart.
“Fairness is really about treating people differently based on race, gender, etc.,” said Dave Girouard, co-founder and CEO of Upstart. “So to me, equity is about fairness in lending. There are huge opportunities to improve credit outcomes for people at every level and in every demographic group you can name. And we should at least, first, believe it’s possible, and then work hard on the tools and the technologies and the processes and the monitoring and whatever we need to bring it to the fore.”
There are still many people who cannot get credit because of their low or non-existent FICO score, the group members note.
“I hear radio ads in DC that say if you have over 700 credit points, you can be approved in 10 minutes,” said Nat Hoopes, head of public policy and regulatory affairs at Upstart. “It just told four-fifths of black borrowers not to even apply. We think there are people with low FICO scores who are creditworthy.”
The FICO score has value and is a predictor variable, Hoopes said, but FICO score thresholds should not be used as a blunt instrument.
The new group’s job is to raise awareness that Americans have safe and reliable financial choices, according to Phil Goldfeder, senior vice president of Cross River, which provides banking as a service to dozens of fintechs, including Affirm. and Upstart.
“With our partners, Cross River provides responsible lending to consumers who would otherwise have fewer options,” Goldfeder said. “Think of someone in an emergency situation who needs access to funding immediately, what are that person’s options?” he says, citing credit cards, pawnbrokers and payday lenders.
“Fintech creates another option,” he said. “While this is not a credit panacea for everyone, it does create an opportunity to create a financial system that works for every consumer. For example, there is a segment of the population that does not want credit cards .” Credit card debt can be extremely expensive, especially for people who only pay the minimum each month, he pointed out.
If online responsible lending were to be eliminated, “the vast majority of people [who were using online lenders] would end up with a product that is inherently less transparent, not as safe, not as fair,” Goldfeder said. “The goal is to provide options and create services that today’s consumers are otherwise excluded from. This new effort highlights the pragmatic approach we are taking to serving consumers in a regulated and safe environment.”
According to some members, there is also a need for fair lending testing across the industry.
“Whether it’s a human loan officer and the human brain making instant judgments, or whether it’s a FICO algorithm from 1989, or whether it’s Upstart, everybody should do really rigorous fairness testing,” Girouard said. “And we should have conversations about what those tests should be, what the cadence is. These days, where everything is digital, you should be testing every loan and every candidate.”
Consumer advocates also see the new group as a way to ensure Americans have better credit options.
“We all agree that the traditional credit scoring system can be improved,” said Chi Chi Wu, an attorney at the National Consumer Law Center. “We need to create a system that is fairer, more equitable, that has fewer racial disparities and that is more predictive than the current credit reporting and scoring system, and that treats consumers better, that gives consumers more control over their own data and more agency.”
In a fairer system, all data collection would be optional and voluntary, she said. Consumers would have control over their data. Credit scoring algorithms would be developed to reduce racial disparities.
“I’m a lawyer and I can’t do any of this on my own,” Wu said. to try to get the industry moving in the right direction.”
Drawing lines between good and bad actors
Certainly, some fintechs have exploited consumers. Some do hugely expensive loans that support puppy millsfor example.
Some say the line between a fair loan and an operator loan is the 36% cap on interest rates on loans set by the Military Loans Act and observed by many states. Others say transparency, disclosure and having a prudential regulator are hallmarks of a fair lender.
“Good is in the eye of the beholder,” Girouard said. “If you need $400 to fix your car so you can keep working, I’m not here to say 25% is an unacceptable interest rate, if the job is done and that’s the best you can get. If you’re going to Las Vegas to gamble with money, 5% is a bad interest rate.”
Upstart uses the 36% military cap on the annual percentage rate.
The devil is in the details, Wu said.
“There are actors who are worse and others who are better and even good actors can make mistakes on occasion,” she said. “The important thing is to empower them.”
She does, however, write some lines in the sand: Three-digit APRs, one-time lump-sum loans, and credit granted without regard to repayment capacity are all bad, according to Wu.
In the buy now, pay later space, for example, the NCLC would like to see providers do a better job of calculating repayment capacity.
“We want them to be treated more like credit cards because then there are more protections,” Wu said. “But that doesn’t mean we should just get rid of BNPL. important to have these forums.”
Good intentions are not enough to make a company a good player, Wu said.
“There are a lot of companies that have done bad things with good intentions,” she said.
Some simply charge too much.
“Each generation of these innovators thinks they have something new, and it turns out they’re doing what the high-cost lenders of previous generations did,” Wu said. “They often think they’re offering something good to consumers. Some payday lenders say if we don’t provide the credit, they can’t get the car fixed, then they can’t get the job and they’re going to lose their job. I don’t know how many times have I heard this argument. But should you charge as much as you do?”
Wu backs recent calls from some consumer groups for greater oversight of fintech lenders.
Another objective for the group is to improve the position of online lenders.
“The idea that you are innovating does not in itself mean [what you’re doing] is unfair,” Goldfeder said. “That’s the stigma that fintech is facing right now: that all fintech is new and everything is bad. Changing the tone of this conversation is very important and is why Cross River is engaged. MoreThanFair is about expressing what we are doing today, filling the void and providing that access to credit. We try to fight rhetoric with facts.”
The group will combat misconceptions that the online underwriting and lending industry is inherently unregulated or unfair or lacking in consumer protection, he said.
“Innovation and financial services, regulatory compliance and consumer protection are not mutually exclusive ideas,” Goldfeder said. “Fintech companies serve millions of consumers every week in a fair and safe way and that must continue.”